Economic Reporting Review by Dean Baker, January 23, 2006

Economic Reporting Review
By Dean Baker
January 23, 2006

In This Issue:

• Outstanding Stories of the Week
• China
• Housing
• France
• Germany
• Wal-Mart
• Ethanol and Food Shortages
• Wage Growth
• Club for Growth

You can sign up to receive ERR and other CEPR e-newsletters at the CEPR E-newsletter Signup Page. You can find the latest ERR at the Economic Reporting Review Main Page.

Outstanding Stories of the Week

Wealth Grows, but Health Care Withers in China
Howard W. French
New York Times, January 14, 2006, Page A1

This article examines the state of China's health care system. It reports on how the rural health care system has collapsed over the last quarter century, even as the country has grown much richer.

Gee, Bankruptcy Never Looked So Good
Gretchen Morgenson
New York Times, January 15, 2006, Section 3, Page 1
Available to New York Times Select subscribers only

This article reports on the compensation package that the 400 top executives at United Airlines were able to arrange for themselves as the company emerges from bankruptcy. The article reports that these executives will control 8 percent of the company when it emerges form bankruptcy, netting themselves on average almost $300,000 each.

Guidant Debated Device Peril
Barry Meier
New York Times, January 20, 2006, Page C1

This article reports on documents that Guidant, a medical device maker, released in a court case. The documents showed that Guidant was aware of a number of deaths resulting from a heart device it manufactures, six months before it disclosed this information publicly.

Back to Top

China

Foreign Currency Piles Up in China
Peter S. Goodman
Washington Post, January 17, 2006, Page D1

China, a Trade Superstar, Accumulates Foreign Currency (and Anxiety)
David Lague
New York Times, January 17, 2006, Page C4

These articles report on new data showing that China held more than $800 billion in foreign reserves at the end of 2005. It is likely that it will pass Japan in the next year as the largest holder of foreign reserves, with the largest chunk of its currency invested in dollars.

At one point the Post article asserts that it is advantageous for China to hold its reserves in dollars because this allows it to buy planes and other items from the United States. This is comparable to saying that people have to hold large amounts of cash if they want to buy a car. In a modern financial system, this sort of hoarding is completely unnecessary. The foreign exchange markets are extremely liquid. If China held any major currency (euros, yen, British pounds or Swiss francs) it could almost immediately convert its holdings to dollars to buy whatever it wanted from the United States.

The Times article includes an assertion that some economists believe that China is getting a better return on its dollar holding than on alternative investments. Virtually all economists expect that the dollar will fall sharply at some point in the not too distant future because its trade deficit is unsustainable. (The only plausible way to correct a trade deficit, apart from a severe and sustained recession, is a decline in the value of the dollar.) This means that China would lose a large share (@30-40 percent) of the value of its dollar reserve holdings. It would do better with almost any alternative investment than taking this sort of loss on dollar holdings.

Back to Top

Housing

December Housing Starts Declined Sharply
Vikas Bajaj
New York Times, January 20, 2006, Page C3

This article reports on the Commerce Department's release of data on housing starts and building permits in December. The data showed a substantial decline in both categories. At one point the article notes that house prices have not fallen from their year ago levels, adding "and few economists expect them to do so."

It is worth noting that few economists publicly stated that they expected the stock market to fall substantially, even when it was it was reaching its bubble inflated peaks in 2000. The broad S & P 500 index is still more than 15 percent below its 2000 peak (adjusted for inflation). There were also few economists predicting the collapse of the Japanese stock and real estate bubbles in the eighties. (Japan's stock market is currently valued at less than 40 percent of its pre-bubble peaks.) In short, economists almost never predict the collapse of financial bubbles, no matter how apparent the bubble might be.

A Decade After His Death, Mitterrand Still Reigns
Elaine Sciolino
New York Times, January 16, 2006, Page A4

This article reports on the continued popularity of Francois Mitterand, the former socialist party president of France, more than a decade after he left office. At one point the article asserts that: "he made high unemployment permanent." It then adds that he fixed the retirement age at 60 and set in motion a reduced workload that culminated in the 35-hour work week." The paragraph concludes by quoting an editorial in a right-wing newspaper that denounced these policies as "an incredible collection of economic follies."

While the article appears to agree with the right-wing newspaper's editorial position, there is little factual basis for this characterization. It is perfectly reasonable for a country to opt to take some of the benefits of productivity growth in the form of longer retirements and shorter workweeks instead of higher income. Economists describe this as a labor-leisure trade-off. It is a decision involving individual and social choice, economists cannot tell a society or an individual how much they should be working. The fact that these decisions by Mr. Mitterand remain popular is indicated both his continued high standing among the public, and by the popular opposition that conservative governments have encountered when they tried to reverse these policies.

It is not clear what the article means when it asserts that "he made high unemployment permanent." This was not a policy decision, and the causes of high French unemployment are hotly contested. Arguably, the main cause has been the contractionary monetary policy pursued by the European Central bank and its predecessor national banks. While Mr. Mitterand would share in the blame for leaving France's economic fate to these institutions, it would be difficult to hold him solely responsibly for policies that were endorsed with even more enthusiasm by his political opponents. It is also worth noting that there was a sharp and sustained rise in the unemployment rates in Germany, Belgium, Italy, Spain, and the Netherlands during this period.

Rumblings of a German Revival
Mark Landler
New York Times, January 17, 2006, Page C1

This article reports on recent evidence indicating that Germany's economy is gaining strength. The article includes several comments which falsely imply that there is a consensus about the direction that economic policy must take in Germany.

For example, at one point it discusses the possibility that new government may "push through overdue economic changes." The changes that the article considers overdue are not specified. It also reports that "experts say" that the government will have to weaken labor market protections in Germany. Actually, some experts have pointed out that the evidence that reform of this sort will improve Germany's economy is quite weak. See "Unemployment and Labour Market Institutions: The Failure of the Empirical Case for Deregulation," by Baker, D., A. Glyn, D. Howell, and J. Schmitt.

The article also cites the need for Germany to overhaul its system of health care and pension financing. While Germany's health care and pension system probably can be improved, by almost any measure they are almost certainly performing better than the U.S. system. The United States spends nearly twice as much on health care per person and has worse health outcomes. In addition, the number of people in the United States who will retire with any substantial pension outside of Social Security is falling rapidly. Only half of the workforce even has access to a pension at the workplace, and the bulk of these workers have a 401(k) type defined contribution pension in which they accumulate little money by retirement.

Back to Top

Wal-Mart

Law Aimed At Wal-Mart May Be Hard to Replicate
Reed Abelson and Michael Barbaro
New York Times, January 16, 2006, Page C1

This article examines the likelihood that other states will follow the lead of Maryland and pass legislation requiring that large employers provide workers with health care. At one point the article discusses the opposition to such legislation from various associations of retailers or restaurants. It presents a quote from a spokesperson from one of these organizations asserting that higher health care costs will either lead to job loss or higher prices to consumers. The article should have pointed out that higher health care costs could also be partially absorbed in lower profits by the stores and/or lower compensation for managerial employees.

Back to Top

Ethanol and Food Shortages

Corn Farmers Smile as Ethanol Prices Rise, but Experts on Food Supplies Worry
Matthew L. Wald
New York Times, January 16, 2006, Page A14

This article discusses the growing demand for ethanol as a substitute for fossil fuels. It raises the prospect that increased demand for corn for fuel will lead to higher food prices, possibly causing starvation in poor countries. It is worth noting that this concern runs directly counter to the concern raised in numerous Times articles, that rich country food subsidies were lowering the price of food on world markets. (The Times also expressed this concern very strongly in several editorials.)

These views are directly contradictory. If there is a possibility that increased demand for corn will raise prices and cause the poor to be unable to buy food, then it cannot also be the case that the poor will be benefited if rich countries eliminated subsidies and caused food prices to rise. If the world's poor are on average hurt by higher food prices, then they benefit from rich country subsidies. Alternatively, if the world's poor on average benefit from higher food prices, then, contrary to this article, the prospect that demand for ethanol will raise food prices is good news for the poor.

Back to Top

Wage Growth

Inflation Hit Five-Year High of 3.4% Last Year
Nell Henderson
Washington Post, January 19, 2006, Page D1

This article reports on the release of new data on consumer prices by the Labor Department. The article notes that nominal wage growth, at 3.1 percent, was below the 3.4 percent rate of inflation in 2005. It is worth noting that the annual data mask an uptick in wage growth at the end of the year. During the second half of the year, wages were growing at a 3.4 percent annual rate. With energy prices likely leveling off in the months ahead, the overall rate of inflation is likely to be in the 2.5 to 3.0 percent range. This means that real wages are now growing at a 0.5 to 1.0 percent annual rate.

Back to Top

Club for Growth

Race for Majority Leader Draws a Third Candidate
Carl Hulse
New York Times, January 14, 2006, Page A8

This article reports on the race among the Republicans in Congress to replace majority leader Tom Delay. At one point the article refers to the Club for Growth as "an advocacy group that works to lower federal spending." Actually, the Club for Growth is most known for its drive to promote tax cuts. Lower spending has generally been a secondary issue for the Club for Growth.

Back to Top

Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.